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Mexican Peso Outlook: Higher U.S. Yields Weigh on EMFX, Banxico on Tap this Week

Mexican Peso Outlook: Higher U.S. Yields Weigh on EMFX, Banxico on Tap this Week

Diego Colman, Contributing Strategist


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  • USD/MXN gains ground on Monday, boosted by rising US bond rates
  • Higher yields in the United States could become a headwind for EMFX if upside moves are too large and occur too soon
  • Banxico’s monetary policy decision this week will be important for the Mexican peso, but US Treasury curve dynamics may be more relevant in the near term

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USD/MXN started the week on the front foot, bolstered by EMFX softness and rising U.S. Treasury rates. Earlier today, the US 10-year yield briefly rose to 1.51%, its highest level since June, supported by better-than-expected US economic data (e.g., August durable goods orders) and expectations that the Fed will soon start to withdraw policy accomodation.

Although the Mexican peso maintains an outsize carry-advantage over the dollar (USD), increasing yields in the United States can still be detrimental to emerging market currencies, especially if the moves are large and occur over a short period of time (abruptly). For reference, from mid-February to early March, when the 10-year rate shot up from 1.22% to 1.62% in less than three weeks, the Mexican peso weakened more than 8%, before regaining ground towards the end of the first quarter.

If the same dynamics were to play out in the bond's market again, volatility could come roaring back any moment, hurting risk-appetite and lifting USD/MXN, at least temporarily. For this reason, traders should closely monitor sentiment towards EMFX and how the US Treasury curve evolves over the next few weeks.


Focusing on the Mexican economy, Banxico will announce its September monetary policy decision on Thursday. Consensus suggests that the institution will raise borrowing costs by 25 basis points to 4.75% in order to head off elevated price pressures and ensure that inflation expectations do not become unanchored. The hike, which would be the third consecutive adjustment, is fully priced in, so market participants will be paying closer attention to the bank's guidance to determine whether or not further tightening is in the cards.

Given that both headline and core CPI are currently above the 3% target and present upside risks, the central bank could leave the door open for additional rate hikes this year. A hawkish bias may create a constructive backdrop for the Mexican peso over the medium term, but is unlikely to prevent losses in the event of a major EMFX downturn on rising yields in the US.

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After recent gains, USD/MXN is tentatively approaching key resistance near 20.10/20.20, an area where the 200-day SMA aligns with a long-term descending trendline extended from the June 2020 high. If price action manages to climb above this technical barrier, bulls could push the exchange rate towards 20.50, followed by 20.85 amid renewed buying-interest (see daily chart).

On the flip side, if bears regain control of the market and drive USD/MXN lower, the first support appears at 19.80, near the August and September lows. A move below this floor would be needed to rejuvenate selling momentum and target the 2021 low near 19.55.


USDMXN technical chart

Source: TradingView


---Written by Diego Colman, DailyFX Market Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.